How a Gift Can Put Everything You Own at Risk

One in three professionals will be sued at least once. That’s why asset protection is so important for medical professionals. It doesn’t always matter whether you actually did anything wrong, it’s more about whether you have any assets someone else might want.

Just this past month, I met with a new client to go over his asset protection and tax savings plan. It’s often a fine dance between asset protection and tax savings when it comes to strategies. This one was no exception. The problem was that he was already being sued and it had nothing to do with anything he had done. It had to do with a gift he had received. His father was a real estate developer. One of the properties he bought was an old industrial site. He did his due diligence and even went so far as to get a letter from the state saying that there were no hazardous waste issues. Later, he confirmed in writing that was the case and didn’t hear back from the state.

Later, he renovated the property, and about the same time, he put his own estate plan into place. He wanted to bring his four children into his many developments, so he made a simple title change. A month or so later he went to an estate planning attorney who explained that it wasn’t a good idea and the properties were instead put inside a Family Limited Partnership. This allowed him to gift the properties at a discount so that he could give more value away, without tax, and still control the properties. And the assets were protected because they were inside a Limited Partnership.

He rented the subject property to a pre-school and all was well. That is, it was well until a governmental agency discovered a state report that showed the property had been used as a thermometer manufacturer. Not only that, the manufacturer had followed the practice of dumping mercury on the grounds. Now children played in the grass, rolled around the playground, and drank water that came from a well on the grounds.

The school was closed and a class action suit was mounted against the school and anyone else they could find. The Limited Partnership protected the partners, but the problem was that the father had originally just made a title change to his children. For that 30-day period in which the title was held in the father’s name along with his children, it was determined that they had a General Partnership. A General Partnership means that all partners are jointly and severally liable. And that means that my new client is now being sued as well, personally. He is risking his business, his house, his savings—everything—simply because he received a gift in a bad structure.

Before you start any business venture, buy any investment, or for that matter take title to any property, make sure you check in with your professional advisors. One little misstep could risk everything you’ve worked so hard to earn.

Diane Kennedy, CPA is the author of the best-selling Loophole of the Rich and Real Estate Loopholes, along with 5 other books. For more tax-saving information, see her website www.LessTaxForDocs.com.